Elderly mother has huge credit card debt. What to do?

Also: Advice about SEPs, one of the easiest ways for the self-employed to save for retirement.

Dear Liz: My 74-year-old mother was laid off from her full-time job in May. My siblings and I were horrified to learn that she owes $41,000 on 12 credit cards with interest rates ranging from 9.9% to 29.9%. None of the issuing banks is willing to lower her interest rates. With her Social Security benefits and unemployment, she is just barely getting by, but unable to afford more than her minimum payments on the credit cards. She does not own a home and rents a duplex for $650 a month. She has about $70,000 in a retirement fund, $600 in savings and a used car.

One of my siblings has suggested that she stop paying the credit cards altogether and let the debts go to collection. Another has suggested bankruptcy, but we're uncertain how that would affect her retirement account. Either scenario would affect her credit scores, which would then be a consideration for future employment and could raise her auto insurance rates. Any suggestions?

Answer: If your mother simply stops paying her credit card bills, the issuers or subsequent collectors could sue her over the debt. Because there's little hope of her being able to pay these bills — her unemployment benefits will end someday, and her prospects of finding another job are probably slim — bankruptcy may be the best of bad options. A Chapter 7 liquidation filing would protect her from creditors, erase the debt and allow her to get a fresh start. Her retirement fund would be safe; whether her small savings account or car would be at risk in a bankruptcy filing depends on state law.

Yes, her credit scores would certainly suffer, and in most states (although not California) that can lead to higher insurance rates. But at this point, her credit scores are probably the least of her worries.

Another option is that the siblings could pitch in to pay off or settle these debts. Although paying off the cards in full would preserve her credit, that may not be the best option. She used these cards to live beyond her means in good times, so she would be tempted to run up more big balances as money gets tighter. If you settle the debt for less than what she owes, the accounts would be closed and her credit would be trashed, so she would have trouble accumulating new debt — at least for a while.

But you may well decide that a better use of your money, if you have any to spare, is to help support her in the future.

It might help to know your mother isn't alone in her troubles. A Consumer Bankruptcy Project study found the rate of bankruptcy filings more than doubled from 1991 to 2007 for people 65 to 74. For people 75 to 83, the bankruptcy filing rate rose 433%.

SEPs for the self-employed

Dear Liz: How much can I contribute to a simplified employee pension IRA each year? I am self-employed, selling residential real estate. My income varies each month.

Answer: If you're self-employed, you can contribute 25% of your earned income or $49,000 — whichever is less — to a SEP for 2010. Earned income is defined as your gross income from your business minus allowable business deductions, including contributions to the SEP. (You're considered self-employed if you work for yourself and your business is not incorporated. Otherwise, you would need to follow somewhat different rules to determine compensation.)

A SEP is one of the easiest ways for the self-employed to save for retirement, because you don't have to commit to a certain funding level and you don't have the potentially expensive reporting or actuarial requirements that often come with other plans. You should read IRS Publication 560, Retirement Plans for Small Business, and talk to a tax pro to make sure you get the details right.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or via the "Contact Liz" form at asklizweston.com. Distributed by No More Red Inc.